Crushing Gillard's gold-plated fantasy
The criticism power companies have faced over supposed gold-plating of electricity networks looks unfounded as peak demand reaches scorching levels around the country.
"G” stands for "gold-plating”, of course.
It’s the word that was thrown around with abandon last year by politicians, led by the prime minister, some regulators and the media as they tore into the electricity supply networks, riding a community backlash over soaring power bills. Now the real world has caught up with the rhetoric.
Earlier in January, when New South Wales, the largest electricity consumption area in the nation, home to a third of households, encountered 40 degree heat, demand peaked at 13,051 megawatts. On Friday last week, with the temperature hitting a record 46 degrees in parts of the state – and especially (for demand purposes) in Greater Sydney – the peak load went beyond 13,500 MW. The average Sydney load is less than 8,000 MW.
Not only was there no political G-word to be heard, but the media steered clear of telling us how the well the networks were holding up. If they had failed, of course, it would have been headlines galore.
The Electrical Trades Union NSW wasn’t going to let the heatwave go by without having a go at the critics.
In a media statement, the ETU challenged "some politicians” who had talked of gold-plating to repeat the jibe and took the opportunity to warn that reductions in network investments and reliability standards will mean that "future extreme heat days could be very different.”
Even a taunting headline in The Australian reporting the union criticism – "Gillard power play torched” – was not enough to draw a reaction from her or anyone else in her government over the past 10 days.
No-one from Labor went on the telly to suggest the ETU is "talking bullshit,” a phrase that cropped up, you may recall, over the Coalition’s anti-carbon tax rants.
Behind all this lies the fact that, confronted with rising peak demand as well as legislated requirements for greater system reliability (dictating action to replace aged assets), east coast networks, and especially those in New South Wales and Queensland, won regulatory approval six years ago for capital outlays of more than $40 billion to 2014.
This, in turn, led to price spikes consumers have never seen before – but the expenditure has also delivered a network more capable of coping with extreme weather.
Yes, about a quarter of the recent rise in network charges flows from infrastructure investment to deal with peak demand.
And yes, two years of cooler weather meant that the summer of 2012 delivered peak levels far below those predicted – clear evidence, said the critics and the media, of "gold-plating”.
But here we are coping with the mother of all east coast heatwaves with demand peaking up towards record levels – in New South Wales this is 14,820 MW set on 3 February 2011 – and probably only not getting nearer because of a lower industrial load (holidays and economic impacts) and the education system still being shut.
Just after Gillard delivered her August power price polemic, the Australian Energy Market Commission produced a report, requested by the O’Farrell government, on whether network standards have been responsible for excessive costs?
The AEMC found that while improvements can be made to the standards, there is limited scope to cut charges by reducing them.
Hold a plebiscite in New South Wales now on whether household consumers want standards cut and the chances are they would overwhelmingly vote "No" before retreating back to their air-conditioned comfort (nearly three-quarters of homes now have aircon systems).
You would get much the same answer in south-eastern Queensland – where the peak this month in the Energex franchise area, serving Brisbane and its heavily-populated coastal neighbourhoods, reached 3,800 MW, not all that far below the record of 4,670 MW in the 2010 summer.
Homeowners in this region are forecast to buy another million air-conditioners in the next five years, bringing the number installed up to 2.4 million, with many houses and units having two apiece (some have four).
Nationally, federal government consultants forecast that the stock of air-conditioners will be close to 13 million at the decade’s end, double what it was in 2000.
Network "gold-plating” may have seemed like a useful wedge for Julia Gillard in recent months, enabling her to fend off criticism of the carbon price while attacking state governments that are now conveniently no longer Labor, but it is a hollow message in the present environment.
The unhappy consumers are still left with electricity bills adding to cost of living pains despite the spin about the problem and possible reform moves. The level of east coast demand this searing summer is going to be reflected in household power bills arriving in March. They will be followed in May by regulatory price determinations in New South Wales and Queensland.
In September, bills will arrive reflecting the high use of electricity through the winter – including, if it's very cold, some peak levels approaching records – as well as (probably) higher tariffs from July 1.
Messing with electricity is a dangerous game and may yet turn out to be a shocking experience for Gillard and her spinners.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free